Aug. 31 (Bloomberg) -- The so-called bad bank Spain’s
government will set up to take soured real estate from the
lenders it has bailed out will seek private investors and try to
sell the assets over 10 to 15 years.

“The asset-management company should be viable and not
generate losses and in the end not have any impact on the
taxpayer,” Economy Minister Luis de Guindos said at a news
conference in Madrid today. The aim is for private investors to
take a majority stake in the bad bank that would take on real
estate assets, he said.

The bad bank was among the mechanisms approved today by
Spain’s cabinet as it set out a new framework for restructuring
a banking industry mauled by losses from the country’s property
crash. The terms of the European bailout of as much as 100
billion euros ($126 billion) that Spain sought for its banking
system in June require the government to spell out procedures
for dealing with failed lenders that limit costs to taxpayers.

“A bad bank is clearly the right mechanism,” said Tobias
Blattner, a euro-region economist at Daiwa Capital Markets in
London. “It’s a tool that we know can work to help banks do
what they need.”

Spanish bank shares rose after de Guindos unveiled details
of the bad bank. Banco Santander SA, Spain’s biggest lender,
climbed as much as 5.4 percent and Banco Sabadell SA as much as
6.3 percent.

ECB Bailout

Spain is tightening bank regulation against a backdrop of
doubts about the nation’s finances that has spurred the
government to call on the European Central Bank to buy its bonds
to rein in financing costs. Spanish lenders have about 180
billion euros of troubled real estate assets, according to the
Bank of Spain.

“From the market’s perspective, what matters most at the
current juncture is the anticipated request from Spain for a
broader bailout deal,” Blattner said. “These details won’t
have an impact until we know more about the wider picture.”

In its third reform of the financial system this year, the
government also bolstered the powers of its bank rescue fund,
known as FROB, to restructure troubled banks. FROB will be able
to take on debt to a limit of 120 billion euros in 2012, the
economy ministry said in a statement.

Referring to plans to shore up the Bankia group, a lender
taken over by the government in May, de Guindos said FROB may
consider injecting funds into the bank before a definitive
recapitalization plan is completed.

The cabinet also set out ways for dealing with banks that
can’t be salvaged by restructuring and a framework for imposing
losses on holders of subordinated debt on failed lenders.

‘Bridge Bank’

The rules now give the authorities “early intervention”
powers for banks in trouble that would be recapitalized by
issuing contingent capital securities for a maximum of two
years, the economy ministry said in a statement. The bonds,
known as CoCos, convert into equity if capital ratios fall below
a certain level.

In cases where a bank proves to be not viable, the
authorities can force the sale of its business or transfer its
assets and liabilities to a “bridge bank” before an eventual
sale, the ministry said.

The government also toughened rules for sales of
subordinated debt such as preference shares to retail investors.

From now on the minimum investment in the securities issued
by non-public companies will be 100,000 euros and half of the
amount should be sold to professional investors, the ministry
said. In the case of debt sold by public companies, the
threshold amount will be 25,000 euros.

The government also adjusted its solvency rules to make all
banks achieve a so-called principal capital ratio, a measure of
financial strength, of 9 percent by 2013. The requirement is now
8 percent or 10 percent for banks deemed to have difficult
access to wholesale financing or be too reliant on it.